Toyota, Honda losing speed to compact rivals

Just a year ago, no one could touch the kings of compact cars, the venerable Toyota Corolla and feisty Honda Civic.

Both stood so far above the more prosaic vehicles in the segment that they were automatic choices for most consumers.

But the segment today — reshaped by intense competition, growing fuel economy considerations and a devastating earthquake — looks little like it did in 2010.

Although the Corolla remains the best-selling car in the segment, the all-new Chevrolet Cruze has pushed its way into second place, selling at the rate of 21,000 cars a month and growing. The Civic has dropped to No. 3, according to Automotive News.

"Honda and Toyota's dominance is fading, and both face formidable competition from the domestics and Koreans," said Jesse Toprak, vice president of industry trends at TrueCar.com. "They've never seen that before."

As inventory-limited Japanese brands drop, the all-new Ford Focus and Hyundai Elantra are also on the rise. Through August, for instance, the Elantra's sales were up 46.8 percent, according to Automotive News.

Toyota, Honda and Subaru suffered substantial damage to their factories after the earthquake and tsunami in Japan in March, and all still lack inventory.

Toyota of Lewisville, Texas, for example, is sold out of Corollas and Scions, and may not have a full inventory until sometime this month, said Rene Isip, majority partner of the dealership.

"If the field was level, I'd like to see how all of this plays out," Isip said. "If we still had inventory, Hyundai and the domestics might be up, but not like they are."

Some analysts aren't so sure. Even before the earthquake, the Corolla and Civic looked vulnerable, they say.

The Corolla is several model years old and wasn't considered stylish when it was new. The Civic, while new, has been coolly received, failing for the first time in years to win a "recommended" rating from Consumer Reports.

"Lots of Corollas were going into (rental) fleet sales before the earthquake and tsunami," said Rebecca Lindland, director of research for IHS Automotive in New York. "And when Consumer Reports did not give the Civic a 'recommended,' that was a sea change."

Though most analysts expect Toyota and Honda to fight back hard when they have full supplies of cars, they doubt that either will dominate the segment again.

"This is beyond the tsunami and earthquake," said Jack Nerad, executive editorial director of KBB.com. "The competition is catching up. The Japanese brands are still really good, but the Koreans and domestics are better than ever."

Toyota, meanwhile, believes that the Corolla will re-establish its leadership position once inventories are back to normal this month.

"While other models may make short-term inroads, there is no way they can match Corolla's 40-plus year history of providing high-value, high-quality vehicles," said Mary Legallet, Corolla product manager.

The compact segment is the largest in the new-car industry but typically generates the lowest profit, analysts say. For years, it attracted mostly young buyers with limited income or retirees looking to downsize. Domestic automakers largely ignored it when pickups and SUVs were hot, relying on trucks for most of their revenue.

But now everyone in the industry faces daunting new fuel-economy standards beginning in 2016, and compacts will be crucial to automakers' efforts to meet those rules, which demand an average of 54.5 miles per gallon by 2025.

"The days of our spending like drunken sailors will come to an end, and in American households, already have," Pipas said. "We are moving to smaller, more thoughtful consumption — sustainable consumption."

Compact car sales generally go up when gas prices spike and fall when they drop. But each time they drop, the sales base settles at a higher level than in previous quarters.

"Smaller cars have gained larger market share every year since 2004 except 2010 — and we were in a lousy economy then," Pipas said.

To attract a broader array of buyers, new vehicles such as the Ford Focus, Hyundai Elantra and Chevy Cruze offer crisp, contemporary styling, well-appointed interiors and European-style platforms.

Although new competitors like the Focus and Cruze have base prices that are higher than those of the Corolla and Civic, they are often better equipped, with six-speed automatics, direct fuel injection and turbochargers.

"The reason Honda and Toyota had success is they had good value," said Thomas Quintana, chief operating officer of Q Chevrolet in Irving, Texas. "Now so does the Cruze."

Quintana, whose dealership has less than a 45-day supply of Cruzes, said he would double his inventory if he could get the cars.

Dealers say Cruze and Focus sales also benefit from extraordinarily high used-car prices. Rather than spend $20,000 on a used car with 30,000 miles on it, some consumers buy a well-equipped Cruze or Focus instead.

The Cruze is "our No. 1 car, outselling the Camaro," said Ray Huffines, chief executive of Plano, Texas-based Huffines Auto Dealerships, which includes Chevrolet stores in Plano and Lewisville.

"I think there is a progression downward with buyers," Huffines said. "We wish we could get more Cruzes to go with it."

The higher level of competition in the segment didn't surprise Toyota or Honda, said Dane Minor, general manager of Freeman Toyota in Hurst, Texas, and Freeman Honda in Dallas.

"We knew our competitors would get into this segment," Minor said. "And they are definitely building better products — and have to. But Toyota and Honda have the experience in this segment, and they have an advantage, I think."